Fitch Ratings-London-01 June 2011: Fitch Ratings has affirmed the Republic of Cameroon's Long-term foreign currency Issuer Default Rating (IDR) at 'B' with Stable Outlook and Short-term foreign currency IDR at 'B'. The Long-term local currency IDR remains at 'B-' with Stable Outlook. The Country Ceiling, common to members of the Economic and Monetary Community of Central Africa (CEMAC), is affirmed at 'BBB-'.
Cameroon's 'B' foreign currency IDR primarily reflects its weak economic fundamentals. The economy largely relies on agriculture and commodities exports, in particular oil, and although it is more diversified than many African peers, it remains highly exposed to external shocks. The economy grew modestly in the 2000s, with an average rate of 2.9% since 2006, only slightly above the rate of population growth. GDP growth reached 3.2% in 2010, from 2.4% in 2009 and it should not dramatically increase in 2011 (Fitch's projection is 3.8%). Inflation has been subdued (1.3% in 2010), due to large government subsidies on petroleum products and several basic food products.
The main reason for slow growth is the country's inadequate infrastructure, especially in energy and transport. Due to Cameroon's poor business climate, the domestic investment rate has historically been well under the average for peers in the 'B' rating category. Consequently, the economy is largely informal and relies heavily on agriculture and commodities. Oil represents a large proportion of exports (39.9% in 2010), but output is declining. Production volume decreased by 9.5% in 2010 compared to 2009. Oil output will decline further in 2011, but the government expects a slight increase in 2012, as two new fields enter production.
The state's presence in the economy remains significant. Fitch expects no significant change in 2011, which is an election year. President Paul Biya, aged 78, has been in power since 1982, and Fitch expects him to run for a new seven-year mandate. His political longevity is due to his capacity to maintain a balance of power between the different ethnic, religious and linguistic groups in Cameroon. Due to divisions among the opposition parties and the lack of credibility of his main opponents, he is likely to be re-elected. However, his succession, if he dies or resigns, constitutes a source of political risk, as no successor has been groomed.
Cameroon has a low level of public and external indebtedness. This mainly reflects the substantial debt relief it obtained in 2006, when it became eligible for debt reduction schemes. Public debt was 15.8% of GDP at end-2010 (2009: 14.1%). Thanks to the substantial loans and grants received from donors, international liquidity measures are excellent, with reserves covering 6.4 months of current external payments (CXP) at end-2010.
Although deficits remain under control, Cameroon's fiscal situation deteriorated in 2009-2010, despite the under-execution of the capital expenditure programme. Oil revenue is declining, but subsidies for oil and basic food products have increased. Fiscal revenue will further decline in 2011, as the state will not allow an increase in gasoline prices in an election year. Fitch expects the budget deficit to modestly widen in 2011 to 2.3% of GDP (commitments basis). It will be financed mainly by treasury bills issuance, leading to a moderate increase in public debt. Cameroon issued a treasury bond for the first time in 2010, and as the authorities develop a stronger track record of issuance and repayment, an upgrade of the local currency IDR is possible, as the 2004 default fades further into history.
Longer term, the depletion of oil reserves is a source of concern, as oil represents 27% of fiscal revenue. A prolonged decline in output and/or failure to start production in new oil fields would put negative pressure on the rating. An upgrade of the foreign currency rating would rely on the implementation of long-awaited infrastructure projects, which would boost economic growth, and on sustained efforts to improve the business climate.
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